Bloomberg News

Hungary Unexpectedly Holds EU’s Highest Rate on Forint Rally

February 03, 2012

(Updates with forint in second paragraph, economist comment in fourth.)

Jan. 24 (Bloomberg) -- Hungary unexpectedly left the European Union’s highest benchmark interest rate unchanged as local assets rebounded from record lows after Premier Viktor Orban said he would yield in a row with the European Union.

The Magyar Nemzeti Bank held the benchmark two-week deposit rate at 7 percent today after raising it by 50 basis points in two consecutive steps. Twenty of 21 economists surveyed by Bloomberg predicted an increase. The forint snapped a five-day winning streak to weaken as much as 1.1 percent and was down 0.8 percent at 302.22 per euro at 2:21 p.m. in Budapest.

Orban is in Brussels today, seeking to restart bailout talks that broke down last month over a central bank law that the International Monetary Fund and the EU said threatens monetary-policy independence. Speculation that the talks may collapse pushed the forint to a record low against the euro earlier this month. Orban’s pledge to change legislation to satisfy the 27-member EU helped local assets pare losses.

“Today’s decision is the reflection of a recovery in global risk appetite and signs that the government adopted a more conciliatory tone,” Neil Shearing, a senior emerging- markets economist at Capital Economics in London, said by phone. “The main issue is whether these two factors will be sustained and this is essentially what the rate outlook hinges on.”

Forint Rebound

Orban’s conciliatory rhetoric sent the forint, the worst- performing currency in the world in the past six months, rallying 5.8 percent against the euro since falling to a record low of 324.24 on Jan. 5.

The yield on 10-year government bonds fell to 9.235 percent from 10.8 percent on Jan. 4. The cost of insuring state debt against default dropped to 594 basis points after reaching a record 735 on Jan. 5.

Hungary’s rate increases contrast with the Romanian central bank, which has lowered borrowing costs twice in the past three months by a cumulative half-point to 5.75 percent. Romania agreed on a 5 billion-euro ($6.5 billion) precautionary program for two years with the IMF last March.

The Ceska Narodni Banka in Prague has left its two-week repurchase rate unchanged at a record-low 0.75 percent since May 2010, a quarter-point below the European Central Bank’s main refinancing rate. Poland left its benchmark rate unchanged at 4.5 percent for a sixth meeting on Jan. 11.

‘Absolutely Ready’

Hungarian forward-rate agreements, used to bet on three- month interest costs in one month, fell 5 basis points to 7.76 percent, the lowest on a closing basis since Jan. 3. The Budapest Interbank Offered Rate, to which the FRAs settle, traded at 7.65 percent.

Hungary is ready to change its central bank bill and other laws because starting talks on an IMF loan is more important for the government than engaging in a legal battle with the European Commission, Orban told reporters in Budapest Jan. 20.

“I’m absolutely ready to discuss all issues, regardless how difficult these issues are, in an open manner and draw the conclusion - if it’s possible to draw the conclusion - and find an agreement together,” Orban told reporters in Brussels today after meeting European Parliament President Martin Schulz.

Orban will meet European Commission President Jose Manuel Barroso later today to outline solutions to the EU executive’s concerns. The commission threatened on Jan. 17 to file a lawsuit against Hungary because of the central bank law, moves to force hundreds of judges into retirement by cutting their pension age and a plan to dismiss the data protection ombudsman after an overhaul of his office.

‘Very Important’

“The meeting is very important,” Mihaly Varga, Orban’s chief of staff, told TV2 in an interview yesterday. “In all three issues, the Hungarian government will make flexible negotiating proposals.”

Hungary, which became the first EU country to receive an IMF-led bailout in 2008, shunned fresh aid in 2010 when Orban became prime minister. He reversed his policy last year when the state started struggling to raise funds at debt auctions, the forint plummeted and the country’s sovereign-credit grade was cut to junk.

Hungary has become a test case for democratic principles and economic-policy rules in the EU, forcing the commission to make good on a pledge to use all its powers to enforce the bloc’s norms. The country, which isn’t part of the 17-nation euro area, risks compounding the two-year-old European debt- crisis centered on the single currency.

Rate Outlook

Hungary’s public debt rose to 83 percent of gross domestic product at the end of the third quarter, the highest in the region. It compares with about half that ratio for neighboring Slovakia, which joined the euro in 2009.

The central bank last month said it may have to raise the main interest rate further if risk perception deteriorates “substantially.” Five policy makers backed an increase to 7 percent in December while two -- Ferenc Gerhardt and Gyorgy Kocziszky -- supported a quarter-point advance to 6.75 percent, according to the minutes of the meeting published on Jan. 11.

Gerhardt and Kocziszky were two of four outside members of the rate-setting Monetary Council appointed last year by a parliamentary committee dominated by lawmakers belonging to the ruling party.

--With assistance from Andras Gergely in Budapest. Editors: Balazs Penz, Alan Crosby

To contact the reporters on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net; Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net; Balazs Penz at bpenz@bloomberg.net


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